Oversea-Chinese Banking Corp OCBC - UOB Kay Hian 2016-02-18: 4Q15 ~ Realistic And Proactive Management Of Exposure To Oil & Gas Sector

OVERSEA-CHINESE BANKING CORP OCBC O39.SI

Oversea-Chinese Banking Corp (OCBC SP) 4Q15: Realistic And Proactive Management Of Exposure To Oil & Gas Sector

A good set of results with NIM expanding by a massive 8bp qoq and fully loaded CET-1 CAR catching up with peers at 11.8%.
Management is forward looking and recognised NPLs of S$822m to the oil & gas sector.
While the macro outlook is uncertain, valuation is near the trough with 2016F P/B at 0.93x and dividend yield at 4.6%.

Oversea-Chinese Banking Corporation’s (OCBC) 4Q15 net profit of S$960m was above our expectation of S$818m.
Loan growth was modest at 0.4% qoq. NIM expanded by a massive 8bp qoq to 1.74% due to higher asset yield.
Fee income increased 5% yoy to S$402m with healthy growth from wealth management (+6% yoy), fund management (+21% yoy) and credit cards (+21% yoy).
Contributions from insurance and net trading income were better than anticipated. Great Eastern benefitted from write-back of prior years’ tax provisions, release of reserves on improved claims experience and mark-to-market gains from the narrowing of credit spreads.
Operating expenses were well controlled and increased only 5.6% yoy.
NPLs increased 5.8% qoq but NPL ratio was unchanged at 0.9%. The increase in NPLs was largely from Singapore and Indonesia. The proportion of NPLs not overdue is down to 28.9% from 36.1% last year, reflecting a gradual deterioration in asset quality.
OCBC has caught up with CET-1 CAR at 11.8%, based on full implementation of Basel III. Quality of funding was enhanced with CASA ratio improving from 44.6% to 48.9%.

Management expects low single-digit loan growth in 2016. Demand for loans is weak in Singapore. Some customers are looking at investing overseas in Australia, the UK and the US. Management expect single-digit growth for housing loans due to drawdown of existing loans and booking of new loans.
NIM is expected to be slightly higher than the average of 1.67% in 2015.

Management sees a challenging macro environment, given that business confidence is weak and financial markets remain volatile.
Slower growth in China will reduce demand for commodities, which affects growth in emerging countries.

OCBC has loans of S$12.4b to the oil & gas (O&G) sector, or 6% of total loans (2014: S$13.8b). Offshore support services related to the chartering of barges, tugs, support vessels and rigs accounted for 47% of the O&G loans. About 14% or S$822m of the exposure to offshore support services is deemed vulnerable and has been restructured and recognised as NPLs.
NPL ratio is 0.93%, of which 0.39% (42% of all NPLs) is related to exposure to the O&G sector. We estimate NPLs for the O&G sector has increased from S$21m last year to S$822m currently. We estimate NPL ratio for the O&G sector at 6.6%.
OCBC has taken some specific provisions for exposure to the O&G sector in 2015. Management looks at expected cash flows from loans, value of collaterals based on force sale prices and outstanding balance to determine the required amount of specific provisions.

China loans amounted to S$56b, of which only S$6b are onshore loans in China (2014: S$8b). OCBC China has exposure of S$3b to state-owned enterprises and large corporations. OCBC Wing Hang has exposure of S$3b to commercial and SMEs. Some 99% of OCBC Wing Hang’s SME loans are secured with collaterals. The balance S$50b is booked offshore as trade finance and cross border investment loans.
OCBC’s NPL ratio for Greater China remained extremely healthy at 0.4%.

OCBC trades at 0.93x 2016F P/B (global financial crisis trough: 0.83x) even after assuming a deterioration in asset quality of a similar magnitude to that seen during the global financial crisis. The stock provides an attractive dividend yield of 4.6%.
Our target price of S$9.98 is based on 1.19x P/B, derived from the Gordon Growth Model (ROE: 9.3% (average of 2016F, 2017F and 2018F), COE: 7.8% and Growth: 0.0%).

Growth from regional markets in Malaysia, Indonesia and China.
Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-18

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 9.98 Up 9.80